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Presentation on Ethics

AF301 Seminar
by

Sonal Kumar

on 20 March 2013

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Transcript of Presentation on Ethics

Ethics In Accounting Profession Research Team Rahul Narayan
Kunal Prasad
Kaushik Kumar
Saawan Kumar
Sonal Kumar Abstract purpose of this research paper- study the ethical issues in Fiji
methods used:
interviews
questionnaires
library research
internet sources abstract cont.....
ethical standards are highly maintained in Fiji
different criteria’s to deal with ethical issues
no major issues that are related to ethical virtues in accounting profession compared globally
business with a high level of ethical standards are more likely to thrive and vice-versa Presentation Outline: * abstract * Research objectives * Literature Review * Theoretical Underpinning * Discussion Of specific
objectives in detail * limitations * Conclusion ** Vinaka ** Problem Statement The focus of this paper is to evaluate Accounting profession perception on the ethical dimension of their work in Fiji Specific objective
* Standards that govern the ethical behavior of accountants in Fiji
* Ethical dilemma’s concerning the accounting profession.
* Models available to guide accountants facing ethical dilemma’s
* Actions taken for the breach of ethical standards
* Corporate Collapses with relation to ethics Introduction * Introduction Ethics is a very important issue in the accounting profession
Ethics- making a distinction between what is right and what is wrong where there is a high level of uncertainty
“Professional ethics includes standards of behavior for a professional person like auditors that are designed for both practical and idealistic purposes.” (Leung, et al., 2011) Introduction cont... Ethics ensures the accountants to follow rules while they carry out their work to ensure a higher degree fairness which helps boost the confidence of the public in their accounting services they provide
It enables professional accountants to able to maintain professional objectivity as well as integrity Introduction cont... Whenever a professional accountant is confronted to make a decision, the accountant should analyze the facts (observation,consequences & decision)
“To analyze a particular situation, theories had been developed namely teleology, deontology, virtue ethics and ethical relativism” (Leung, et al., 2011) Introduction cont... threats that can causes auditors not to comply with the code of ethics:
self-interest,
self-review,
advocacy,
familiarity and
intimidation Introduction cont... there are ethical dilemmas concerning the accounting profession
ethical models have been introduced, one of them being the AAA model etc. to reduce dilemmas
recent corporate collapses - accountant are criticized with regards to these corporate failures. Introduction cont... accountants have the sole purpose of disclosing relevant and reliable information to the users
users can make well informed economic decisions based on the financial information they have.
Since the users are dependent on the information’s presented by the accountants, it is utmost important that professional accountants should always maintain their professional code of conduct to safeguard public interest. Theoretical Underpinning * Theories are an essential component in understanding ethics in relation to accounting profession
* the following are the relevant theories that explains the ethical issues in accounting profession: Agency Theory highlight ethical issues in the principal-agent relationship
each party will act in his or her self-interest
information asymmetry- due to the separation of ownership and control
owners- maximize their profit AND managers maximize their personal utility Agency theory cont... Therefore, this indicates a need for code of ethics
must comply with relevant reporting standards when they produce the financial report so that the public interest is safeguarded
achieve decision usefulness objective Theories of ethical behavior Teleology
considers actions or behavior according to the consequences of that behavior.
This theory states that if actions of the auditor results in the correct consequences, then this indicate auditors are acting morally and vice-versa
emphasis is on that accountants should think about making ethical decisions that safeguards public interest Deontology
"an action is right because of the process, i.e. the intention, rather than its outcome.” (Leung, et al., 2011)
person will take action that is right regardless of the result it may bring.
For example an accountant should keep a proper record of the company financial issues and not manipulating records like, they should not overstate assets to paint a good image of the company. Virtue Ethics emphasizes on how people act in the most desirable way according to their character.
people’s reaction in any situations is based on the nature of the person
the characteristics a person possess such as honesty, loyalty, courage, compassion that ought to be reflected in their actions.
Accountants with good innate characteristic usually tend to make good ethical decisions Ethical relativism is related with moral values that are acceptable in certain environment and values that relate to that environment in particular” (Leung, et al., 2011).
Moral values in different societies differ because all the societies in the world are not same.
Put simply, when in Rome, do as the Romans do.”
Therefore, these theories of ethics helps professional accountants evaluate any circumstances so that honesty, integrity, wish to exercise due care, objectivity, confidentiality and competence is achieved. Normative theories of ethics provide a principle on how we ought to behave irrespective of current social norms and practise's” (Dellapoertas, 2005).
tends to provide a principle, standards as well as values on how people should behave towards others considering their actions, based on what is right or wrong in a particular situation
two broad normative theories of ethic are: Consequential theories involves in determining what is right from wrong based on the result or consequence of the decision or action
if the good consequences is more that the bad ones, then we can say that the decision or the particular action is morally correct. Non-consequential theories states that actions and decisions must be obeyed regardless of the outcome and the intention to do right things is more important than the results.
The two examples of Non-consequential theories are:
theory of rights
theory of justice Stakeholder Theory relates to particular groups within an organization, defined as employees, financiers, customers and communities, who have different views about how an organization should conduct its operations
stakeholders have a duty of care to use reasonable judgement
business shall be managed in the interests of its stakeholders. Stakeholder Theory relates to particular groups within an organization, defined as employees, financiers, customers and communities, who have different views about how an organization should conduct its operations
stakeholders have a duty of care to use reasonable judgement
business shall be managed in the interests of its stakeholders
two views of stakeholder theory are: Stakeholder Theory cont... Ethical (Normative) Branch
all stakeholders relating to an organization or company holds onto the right to be treated fairly by the organization
issues of stakeholder power are not directly relevant in the ethical branch of stakeholder theory. Stakeholder theory cont... Managerial (Positive) Branch concentration is with relation to the different stakeholder groups within a society and how should they be managed.
fairness would be maintained when code of ethics is being upheld by the accountants so that all relevant stakeholders in the society benefit from the particular decision of the entity SO 1: Standards that govern ethical behavior of accountants in Fiji mostly regulated by various international accounting bodies such as :
the International Accounting Board (IASB),
International Federation of Accountants (IFAC)- International Federation of Accountants IFAC global body that sets professional standards for the accountancy profession
main function of IFAC is in regards to supporting the IASB with respect to setting accounting standard
one of the board set up by IFAC is International Ethics Standards Board for Accountants (IESBA) Overview of International Ethics Standard Board for Accountants (IESBA) key role is the development of the international code of ethics for the professional accountants
With regards to Fiji, the accounting standards body of FIA mainly adopts its code of ethics from the IESBA and makes minor changes so that it is applicable to the Fijian economy. IESBA cont... IFAC has managed to releases a new code of ethics that has come in effective from 30th June, 2006- Recent Issue- June 2012
FIA follows code of Ethics set up by IESBA based on some fundamental principle
According to Richard George (2006), some of these fundamental principles are:
Integrity
Objectivity;
Professional Behaviors;
Confidentiality;
Professional Competence and Due Care; SO 3: Ethical Decision making model
Step 1: What are the facts of the case?
Step 2: What are the ethical issues in the case?
Step 3: What are the norms, principles, and values related to the case?
Step 4: What are the alternative courses of action?
Step 5: What is the best course of action that is consistent with the norms, principles, and values identified in Step 3?
Step 6: What are the consequences of each possible course of action?
Step 7: What is the decision? The American Accounting Association (AAA) model Philosophical Approach the principle of utilitarianism, rights and justice are combined together and states the principles in terms of questions
There are basically 6 questions that needs to be answers effectively to reach a decision. These are: Philosophical Approach Cont... i.What benefits & harms will each course of action produce?

ii.Which course of action will produce the greatest overall benefit for all stakeholders?

iii.What are the rights of stakeholders?

iv.Which course of action respects the rights of individuals?

v.Which course of action treats people fairly and equally- theories of rights

vi.Which course of action results in a fair distribution of benefits and burdens- theories of justice Laura Nash Model (1981) This ethical decision making model uses 12 practical steps or questions to resolve ethical dilemmas.
These steps are: Laura Nash Model Cont... i.Define problem
ii.Define problem from other person’s shoes
iii.How did this situation arise?
iv.Who do you give your loyalty to?
v.What is your intention?
vi.How does this intention compare to the results?
vii.Whom could your decision injure?
viii.Can you discuss with other parties first?
ix.Are you confident your position will hold over a long period?
x.Could you discuss your decision in front of the TV and family?
xi.What is the symbolic potential of your action?
xii.Under what conditions would you allow exceptions to your stand? Mary Guy Model (1990) This model has 10 core values which require consideration.
i.Caring
ii.Honesty
iii.Accountability
iv.promise keeping
v.pursuit of excellence
vi.loyalty, fairness
vii.integrity
viii.respect for others
ix.responsible citizenship

One of the difficulties of this model is weighting the different values. Rion Model (1990) This model requires five questions be answered
i.Why is this bothering me?
ii.Who else matters?
iii.Is it my problem?
iv.What do others think?
v.Am I being true to myself? Tucker’s 5-question model Under the tuckers 5 question model, the following questions are asked:
Is the decision:
Profitable?
Legal?
Fair?
Right?
Sustainable or environmentally sound? 6 Stages of Kohlberg’s framework Level Focus Stage ORIENTATION Post-conventional Universal Principal 6 5 Self-chosen ethical principle Just rules determined
by consensus 4 3
Conventional Community Rule-follower Pleasing others 2 1 Self-interest Avoiding punishment
Pre-conventional Self-centered Source: (Dellapoertas, 2005) SO 4: Action taken for breaching code of conduct • Code of conduct is a set legal guide that states the sets of rules that an employee should abide by at all times.
• The employees of accounting profession are expected to demonstrate integrity, honesty and proper ethical behavior at work.
• Misconduct will not be tolerated and could lead to disciplinary action. Cases of serious misconduct, e.g.: theft, fraud, violence at work will likely lead to termination of your employment. How does unsatisfactory performance relate to misconduct? If the unsatisfactory performance of an employee is for reasons or causes within their control and can be linked to the Code of Conduct, it can be dealt with as a possible breach of the Code of Conduct •Whether or not something is within a person’s control must be determined according to each case, having regard to the person’s physical and mental capacities. •For example, a person’s persistent failure to comply with instructions could be because they are simply incapable of following instructions or because they choose not to follow them” (Podger, 2002). Agency based- misconduct • The employees can breach the regulation of the company for their self-interest.
• For instance the Accountants can manipulate the financial statement in order to meet the target set by CEOs Some of the action that is taken for breaching code of conduct: Major action Outside settlement
Legal action Minor action (small act of fraud) Demotion
Reduce pay
Monitoring work SO 2: Ethical dilemmas concerning the accounting profession •An ethical dilemma is a problem that arises when a reason to act in a certain way is offset by a reason not to act that way.
•There are a range of ethical dilemmas faced by accounting profession Ethical Dilemmas in Fiji 1.Ethical issues relating to measurement
2.Pressure by management
3.Close relationships
4.Misunderstanding the roles of professional accountants and auditor Ethical Dilemma Cont... •Solving ethical dilemmas gives rise to ethical theory.
It is important to note that there would be no ethical theory necessary if all cases were clear-cut. SO 5: Corporate Collapses with relation to ethics Overview of corporate collapses in Fiji *National Bank OF Fiji Case
*Agriculture Sector
*Suncourt Hardware Fiji- 2010
*Fiji Dairy Ltd (Formerly known as
Rewa Dairy Ltd)- Case Conclusion •After conducting the research, it can be confidently said that the ethical standard in Fiji is very good. This can be said on the basis that there have been far fewer cases that were unethical in nature relating to the accounting profession, when compared to countries such as United States. Conclusion Cont... While there have been exceptions such as Fiji Dairy Ltd, SunCourt and NBF which were conducting unethical business practices, this by no means should be used to reflect the situation in the entire country. Conclusion Cont... •The view from the professional accountants is that ethics are important to their work. In addition, because there are no major shortfalls due to ethics in the accounting profession, it is believed by professions that there are no needs to further change or implement new ethical standards. Theoretical Underpinning Agency Theory Theories of Ethical
Behavior Normative Theories Stakeholder Theory * Theories are an essential component in understanding ethics in relation to accounting profession
* the following are the relevant theories that explains the ethical issues in accounting profession: highlight ethical issues in the principal-agent relationship
each party will act in his or her self-interest
information asymmetry- due to the separation of ownership and control
owners- maximize their profit AND managers maximize their personal utility Therefore, this indicates a need for code of ethics
must comply with relevant reporting standards when they produce the financial report so that the public interest is safeguarded
achieve decision usefulness objective Teleology Deontology Virtue Ethics Ethical relativism considers actions or behavior according to the consequences of that behavior.
This theory states that if actions of the auditor results in the correct consequences, then this indicate auditors are acting morally and vice-versa
emphasis is on that accountants should think about making ethical decisions that safeguards public interest "an action is right because of the process, i.e. the intention, rather than its outcome.” (Leung, et al., 2011)
person will take action that is right regardless of the result it may bring.
For example an accountant should keep a proper record of the company financial issues and not manipulating records like, they should not overstate assets to paint a good image of the company. emphasizes on how people act in the most desirable way according to their character.
people’s reaction in any situations is based on the nature of the person
the characteristics a person possess such as honesty, loyalty, courage, compassion that ought to be reflected in their actions.
Accountants with good innate characteristic usually tend to make good ethical decisions is related with moral values that are acceptable in certain environment and values that relate to that environment in particular” (Leung, et al., 2011).
Moral values in different societies differ because all the societies in the world are not same.
Put simply, when in Rome, do as the Romans do.”
Therefore, these theories of ethics helps professional accountants evaluate any circumstances so that honesty, integrity, wish to exercise due care, objectivity, confidentiality and competence is achieved. Consequential Non-consequential provide a principle on how we ought to behave irrespective of current social norms and practise's” (Dellapoertas, 2005).
tends to provide a principle, standards as well as values on how people should behave towards others considering their actions, based on what is right or wrong in a particular situation involves in determining what is right from wrong based on the result or consequence of the decision or action
if the good consequences is more that the bad ones, then we can say that the decision or the particular action is morally correct. involves in determining what is right from wrong based on the result or consequence of the decision or action
if the good consequences is more that the bad ones, then we can say that the decision or the particular action is morally correct. Ethical (Normative) Branch Managerial (Positive) Branch relates to particular groups within an organization, defined as employees, financiers, customers and communities, who have different views about how an organization should conduct its operations
stakeholders have a duty of care to use reasonable judgement
business shall be managed in the interests of its stakeholders relates to particular groups within an organization, defined as employees, financiers, customers and communities, who have different views about how an organization should conduct its operations
stakeholders have a duty of care to use reasonable judgement
business shall be managed in the interests of its stakeholders all stakeholders relating to an organization or company holds onto the right to be treated fairly by the organization
issues of stakeholder power are not directly relevant in the ethical branch of stakeholder theory. concentration is with relation to the different stakeholder groups within a society and how should they be managed.
fairness would be maintained when code of ethics is being upheld by the accountants so that all relevant stakeholders in the society benefit from the particular decision of the entity Literature Review Definition Merriam web-ster (2003) John Buckley & Marlene Buckley (1974) * the discipline dealing with what is good and bad and with moral duty and obligation *A set of moral principles or values *A theory or a set of moral values *The principles of conduct governing an individual or a group. “ethical conduct, in the true sense, is more than merely abiding by the letter of explicit prohibitions; rather it requires unswerving commitment to honorable behavior, even at the sacrifice of personal advantage” (Buckley & Buckley, 1974). Literature Review Cont... Complexity Ronald Duska and Brenda Duska Moral belifes that individual holds maybe insufficient Simple beliefs about complex issues "The study of ethics can help a person sort out these complex issues, by seeing what principles operate in those cases.” (Duska & Duska, 2003). Literature Review Cont... Foundation for civilized society Edward Everett Hale (2007) without code of ethics a business entity will not prosper
guideline to workers facing ethical dilemma. “Ethical values are the foundations on which a civilized society is based on” (Hale, E. 2007). Corporate Culture Literature Review Cont... According to Chen, Sawyer and Williams (1997) * “the ability to see and respond ethically maybe related more to attribute of corporate culture than to attributes of individual employees. The efforts to increase ethical standards and decrease pressure to behave unethically should therefore, concentrate on the organization and its culture” (S., et al., 1997). Literature Review Cont... Accounting collapses in Fiji Dr. Cernusca (2007) creative Accounting
Earnings Management
Misleading Financials
Securities Fraud
Insider Transaction
Bribery... R. Grynberg relates to the case of NBF Literature Review Cont... Deteriorating Ethical Standards Smith & Davis (2004) VS Haka, Willams, Bettener & Carcello (2008) Need to revise current ethical
standards Enhance credibility of Financial
statement Reporting Subjective views of standard
setters What one thinks is adequate may not
be true for others Literature Review Cont... Ethical Model Lueng, Coram, Cooper & Richardson (2011) * Suggested ethical model developed by: Langenderfer & Rockness American Accounting Association Model (AAA) “This model assists professionals in considering the facts of the matter, the values and principles; evaluate issues relating to the matter; identify and compare alternative courses of action; and responsibly make the decision that aligns with the most important value” (Leung, et al., 2011). Difference between code of ethics and Accounting Regulation? 100% respondents response YES Regulations are something that is a must to be followed whereas code of ethics sometimes are disregarded by the accounting professional
Code of ethics is specific to ethical to ethical related situation but accounting regulation is broad in nature and covers whole range of accounting issues globally. View of Ethics in Accounting * If you are doing something in life, it is important to believe it, understand and follow what is required and this is achieved through ethics in the profession Analysis & Finding Action taken Nature of breach 1st Offense
Face-Face Counceling 2nd Offense
Suspension 3rd offense
Termination Fiji's Largest Financial Scandal Overview of NBF Established in 1976
Introduced new lending service 1991
By 1996 - bad and doubtful Debts $200m Ethical Issues :  Huge loan to privileged groups without determining the credit rating of the customers.
 Debt not reported in the financial statements
 Auditor not able to identify and report to the management- Professionals not able to apply due care and diligence. Issues Involved : no monitoring and control,
Manipulation of accounts on purchases.
No stock register maintained for receipt books, cheque books, purchase orders and requisitions sent from faxes thus misuse of funds. Collusion Notable collusion between senior management
at Suncourt hardware & Agriculture Ministry
officials

Approx. 80% of LPO were issued to Suncourt
at higher price Ethical Issues : Negligence by the auditor
Breach of code of ethics for professional accountants while preparing the books of the hardware company. Mr, Sayed- Kaiyum : "the audited report for Fiji Dairy 5 million dollars were unaccounted for. For a small country like Fiji, it is a very significant amount" Unethical Practice
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